Using the Payments System to Enforce an Russian Oil Price Cap Likely to Cause Supply Shock

This is Naked Capitalism fundraising week. 995 donors have already invested in our efforts to combat corruption and predatory conduct, particularly in the financial realm. Please join us and participate via our donation page, which shows how to give via check, credit card, debit card, or PayPal. Read about why we’re doing this fundraiser, what we’ve accomplished in the last year,, and our current goal, expanding our reach.

Yves here. It’s hardly news that just about anyone with an operating brain cell thinks that the pending G7 price cap on Russian oil is a disastrously bad idea. First, experts anticipate that Russia will stick to its guns and not sell Russian crude at discounted prices to the G7 just because they say so. The IEA forecasts that Russia will cut supply by 2.4 million barrels a day, causing oil prices to spike.

Moreover, the G7 plans to use its bank sanctions weapon to force other countries to comply. From Maritime Executive:

Marine insurers, bankers and tanker owners may not be liable if their customers violate the new G7 price cap on Russian oil sales, according to the U.S. Treasury – so long as they rely on their customers’ word for shipment price compliance. The ruling addresses some of the shipping industry’s main concerns about the potential effects of the ban.

On Sept. 2, the G7 finance ministers proposed “a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally” – except for oil purchased below a certain price. The idea is a form of a “buyer’s OPEC”: unless the oil is sold below an artificial price threshold, it can’t be insured or moved without risking sanctions.

The Treasury’s guidance, issued Friday, sets up three tiers of service providers for seaborne Russian oil transport: refiners and oil brokers with direct access to price data (Tier I); bankers and shipowners with occasional access to price data (Tier II); and those who have no access to price data in the normal course of business, like insurers and P&I clubs (Tier III).

All have to keep records of compliance, and all are required to do due diligence on their customers, but shipowners, bankers and insurers have an important exemption: they are allowed to rely on their customers for price data. If that data is fraudulent, they are not liable for accidentally participating in a sanctions violation.

“This recordkeeping and attestation process is designed to create a ‘safe harbor’ for service providers from liability for breach of sanctions in cases where service providers inadvertently deal in the purchase of seaborne Russian oil above the price cap due to falsified records,” advised Treasury’s Office of Foreign Asset Conrol.

OFAC does expect to see attempts at sanctions evasion, and it cautioned involved parties to watch for signs of deceptive practices, such as AIS manipulation or reluctance to provide pricing data.

The office said that it intends to harmonize its regulatory approach with the other members of the G7, indicating that the same guidance will be applied broadly.

So the short version of this is the G7 will require buyers to keep price records, as in price per unit volume, of oil and oil products, and presumably also indicate country of origin. The ones who are not financial institutions (as in subject to having regulators go full proctology on them and having their banking licenses revoked1) would be subject to fines or even having their access to dollar payment systems suspended or revoked if they were found to be cheating. This would apply to traders in non G7 countries too.

Reader Clive believes the banks can implement this system:

It has been worked on for a while, I think most in the industry presumed it was coming (or some version of it).

The process design is, as currently drafted, everything operates as it currently does but there’s an additional step inserted into the Suspicious Activity Reporting (SAR) reviews.

Whether these are system-generated or human-generated, at the first sift (they’re never merely just auctioned on first filing, they’re always reviewed and cross-referenced against other data to water-proof them against malicious reporting or people acting on grudges etc.), if the commodity pricing can be legitimately said to be within the competency of the customer making it — and this is verified against the SIC Code for the customer concerned and other corroborating data, it’s no use Mr. Patel’s corner shop making out they’re oil traders or something — then that particular SAR will be discounted, assuming no other evidence is provided for sanctions evasion.

I suspect the IEA 2.4 million barrel a day estimate is low if the G7 mechanism succeeds in deterring traders outside the G7. Experts have estimate the price could rise to $180 a barrel or even over $300.

Second, OPEC will not help, or will at most pretend to help. The price cap amounts to an effort to break OPEC. OPEC will make out like a bandit from the high prices. They have no reason to help the G7 out of this mess.

Third, the G7 really seems to believe either that Russia is bluffing when it says it won’t sell oil in a capped price regime, or Russia will quickly fold. Russia has had massive budget surpluses due to making even more money at higher prices. By contrast, even if we assume oil goes only to $150 a barrel, the world can’t take more inflationary pressure when inflation is already high. And if the price increases are into unprecedented territory, like the aforementioned $180 a barrel or higher, the psychological and income shock to businesses and consumers will be profound, particularly in countries where their currency is weak versus the dollar.

I would bet yet again that Russia can hold its line longer than the West does. But like the European self-destruction over its refusal to open up Nord Stream 2, I don’t see how the G7 backs down after committing itself to this insane idea.

Yes, the G7 countries can and are storing oil. But oil is messy to store and it’s usually stored by not pumping it. When I last looked at it, oil storage capacity was in the 51 to 55 day range. Anyone with more current data, please speak up in comments. And remember, the US has depleted its Strategic Petroleum Reserve.

Fourth, this would further alienate the Global South and big countries outside the G7 like China and India. They will also suffer from oil price increases and supply disruptions. Russia and China are working on rouble-yuan payment procedures for gas. If these are up and running, they could be deployed on oil. The G7 will be accused of inflicting even more poverty and potentially debt crises on developing countries who have no dog in the Ukraine fight.

Note that the this article is behind the state of play. Russia has said it would insure tanker and the City of London pushed back against using maritime insurance as a means of enforcing the price cap. So tanker insurance is not a choke point. It also uses language like “countries that sign up for the price cap” when as currently outlined, the scheme is intended to force any buyer that uses dollar payment systems to comply.

By Tsvetana Paraskova, a writer for Oilprice.com with over a decade of experience writing for news outlets such as iNVEZZ and SeeNews. Originally published at OilPrice

  • The G7 appears to be intent on implementing its price cap plan designed to reduce oil prices, reduce Russian revenues, and maintain a steady supply of Russian oil.
  • In reality, there is a strong chance that the price cap would send oil prices soaring, with the risk that Russia retaliates by halting energy exports altogether.
  • Russian oil will have to sail on non-Western tankers if it is to avoid the price cap, and there simply aren’t enough tankers available.

The G7-led idea of putting a price cap on Russian oil may look brilliant in theory, but it would likely be very messy in practice, potentially sending oil prices soaring. Surging oil prices are exactly what the price cap is meant to avoid, as it aims to keep Russian oil flowing but at a lower price.

For weeks now, the G7 has been discussing exempting Russian oil from the maritime insurance and financing ban only if that oil is sold at or below a certain price that the group has yet to agree to.

This would require a lot of coordination with EU, UK, and U.S.-based providers of maritime insurance and financing. But it would be the easiest part of implementing the price cap. Russia could intensify its already ongoing efforts to have non-Western tankers and insurers agree to ship Russian oil and products. Or Putin can simply make good on hispromise to halt all energy supply – including crude, fuels, natural gas, and coal – to the countries that sign up to cap the price of Russian oil.

In any case, oil prices will likely go much higher as the EU embargo on Russian oil – which excludes oil sold at or below the price cap – enters into force at the end of this year.

Russia will continue selling its oil to Asian buyers such as India and China using non-Western fleets of tankers and maritime services while choking supply to the West. Russia is also expected to increase its covert oil exports, taking a leaf out of Iran’s playbook of below-the-radar exports by switching off transponders and/or hiding the origin of the oil, analysts say.

Still, the non-Western fleet of tankers that Russia can rely on is not enough, Energy Intelligence’s John van Schaik and Emily Meredith write.

If Russia refuses to use any maritime services associated with G7 countries, “Russian oil will have to sail on non-Western tankers – and there aren’t enough vessels to handle Russia’s millions of barrels,” they argue.

“The result: less oil, higher prices, and less pain for Russia.”

According to Energy Intelligence, Russian oil going to Asia from Russia’s Far East is already shipped there on Russian or Asian tankers. But Russia is estimated to be exporting 4.45 million barrels per day (bpd) from its ports in the Arctic, the Baltic Sea, and the Black Sea – and this is done mostly on EU-linked vessels. Finding tankers and insurance coverage not linked to the EU, the G7, or other countries that may join the price cap mechanism for that amount of oil could be next to impossible.

The G7 reiterated in early September that they would finalize and implement “a comprehensive prohibition of services which enable maritime transportation of Russian-origin crude oil and petroleum products globally – the provision of such services would only be allowed if the oil and petroleum products are purchased at or below a price (‘the price cap’) determined by the broad coalition of countries adhering to and implementing the price cap.”

In guidance on the upcoming price cap, the U.S. Department of the Treasury said last week that the price cap policy has three objectives: “maintain a reliable supply of seaborne Russian oil to the global market; reduce upward pressure on energy prices; and reduce the revenues the Russian Federation earns from oil after its own war of choice in Ukraine has inflated global energy prices.”

While clever in theory, the price cap plan could actually lead to much higher oil prices because trade flows will be upended again, tankers are in short supply, and Russian oil exports – still remarkably resilient – would plunge, analysts say.

The global oil market will have to prepare itself for a loss of 2.4 million bpd supply when the EU embargo kicks in, the International Energy Agency (IEA) said in its Oil Market Report this week. An additional 1 million bpd of products and 1.4 million bpd of crude will have to find new homes, which could result in deeper declines in Russian oil exports and production. The IEA expects oil production in Russia to fall to 9.5 million bpd by February 2023, which would be a plunge of 1.9 million bpd compared to February 2022.

Then there is the very real threat from Putin to simply stop selling oil – and all other energy products – to countries that join the price cap on Russian oil.

“We fully believe that Putin/Russia will follow through on this statement and curb exports rather than to accept any price cap regime. This will leave Russia with a severely reduced set of oil-clients and with a big problem of shipping it out,” Bjarne Schieldrop, chief analyst commodities at bank SEB, said earlier this week.

“The price cap-regime which now seems close to a certainty will highly likely end up having a very, very bullish impact on oil prices,” Schieldrop added.

Despite concerns on the demand side, due to China’s Covid lockdowns and a global economic slowdown, the price cap mechanism “could turn out to be catastrophic to supply and totally overshadow any demand weaknesses for oil,” the analyst noted.

_____

1 Recall that New York Department of Financial Services Superintendent Benjamin Lawsky did threaten to revoke Standard Chartered’s New York branch license over money laundering abuses involving oil trade with Iran and other verboten countries. He literally issued an order saying in pretty much these words, “Appear before me next Tuesday and explain why I should not revoke your license”. This caused outrage in the UK and even freakout in DC. But Lawsky had asked the Fed if he could go ahead with his investigation, and the Fed didn’t realize where Lawsky would go with it.

Print Friendly, PDF & Email

49 comments

  1. ambrit

    This could also accelerate the switch over from the Dollar being the global oil trading currency to a more diffuse set of oil trading currencies. Cut back on Russian oil exports to Dollar using entities and divert some of the ‘excess’ capacity to countries using non Dollar forms of exchange.
    Voila! An own goal par excellance!
    America has yet to admit that they no longer rule the world. This will bring that enlightenment one step closer to fruition.

    Reply
    1. NotThisAgain

      Here we go again…

      1) The US does not benefit economically by being the reserve currency. It does benefit diplomatically (as we are seeing), but a shift to a foreign reserve currency or basket of them would likely benefit the US (greatly) as a whole

      2) Who in their right mind would use Saudi Arabia or any other OPEC country as a primary reserve currency?

      3) Even if they choose to do so, what will Saudi Arabia and the rest of OPEC do with their reserves, other than buy USDs, thereby meaning that the USD is still the reserve currency?

      Reply
      1. ambrit

        Uncooperative foreign oil producers can shift their financial reserves into other currencies. It does not have to be a single currency. It does not have to be the currency of an oil producing nation. It could be a ‘basket’ of currencies, thus spreading the risk. The question is, what currencies do the oil producing nations consider to be of the most use to them? It depends on what they want to buy. Simply put, forward thinking oil producers can cut out the “middle man,” America, and find more “efficiencies” in their economic dealings.
        The major downside, if I read aright, of America losing the status as the world reserve currency would be that America would lose much of the ability to monetize their debt. (Correct me if I err.)
        Additionally, as the case of the Russian USD holdings being “seized” shows, the sovereign that controls the world reserve currency also has the ability to restrict and control another nation’s ability to perform international financial dealings. If there is only one “game in town,” the entity that makes the rules of that game controls everything associated with it. A multi polar world financial system allows for safe havens for ‘heretics’ of various sorts.
        If one is in the least serious about “free markets,” then competition between differing financial means of exchange is a paramount good. A monolithic world financial system is thus profoundly anti-capitalistic. America is going to have to give up it’s status as the world’s reserve currency to save capitalism.

        Reply
        1. NotThisAgain

          OK, let me begin by stressing that I agree that the US will give up its reserve currency status eventually, and likely within a matter of a few years; however it will do so willingly–even eagerly–and the rest of the world will be furious when this occurs.

          Moreover, shifting to a basket of currencies would be the best thing for the US economically, and I assume that it is the US that would try to do this (in fact, the day a US administration decides to do this is the day that I will assume that the financiers are losing political clout to the manufacturers/exporters).

          However, the other country must be willing to provide the reserves (and therefore be willing to run large, persistent trade deficits, as capital outflows are almost identically equal to trade inflows). I can’t think of any country that is willing to do this right now–in fact, virtually every country is in a race to export as much as it can.

          I agree that the US has a strong diplomatic position by having the reserve currency, but that is *very* expensive leverage (think of it as buying diplomacy with domestic growth, although that payment is unequally distributed–finance and the import sector make out like bandits, whereas domestic producers and exporters are hampered). I don’t think many (any??) other countries are willing or able to afford such leverage.

          As an aside, many first world countries issue debt in their own currency–you don’t need reserve “status” to do so. In fact, one of the strongest arguments for most of the EU countries to abandon the Euro (IMHO) is to give themselves the option to do so.

          Reply
          1. NotThisAgain

            As an aside, many first world countries issue debt in their own currency–you don’t need reserve “status” to do so. In fact, one of the strongest arguments for most of the EU countries to abandon the Euro (IMHO) is to give themselves the option to do so.

            This leads to an interesting question that I rarely see discussed properly (and on which I do not have a strong opinion): let’s say for argument’s sake that the US really does need all this foreign capital (this is an enormous stretch, IMO, but I’ll concede the point for the moment). Let’s then say that the US loses its reserve status unwillingly. Let’s also concede that as a result, the US defaults on its debt.

            Question: So what (after the initial few years of rebalancing)? The US basically clears its balance sheet (by forcing creditors–ie, mostly rich people/companies and foreign central banks). Foreigners then will presumably lend to the countries that have the best future growth prospects, which is likely the US again.

            Again, I don’t fel strongly about this–it’s just a mental thought I have tried to game out.

            Reply
            1. Yves Smith Post author

              It’s not true that most EU countries could issue their own debt at anything resembling an affordable interest rate. Greece and Italy definitely can’t.

              We wrote at length in the Greek bailout crisis about how it is pretty much operationally impossible to leave the Euro. It would take a full war level of commitment and take years due to IT issues. European countries can’t even organize an actual war level response in the face of a self induced energy crisis bearing down on them.

              Reply
          2. HC

            the other country must […] be willing to run large, persistent trade deficits, as capital outflows are almost identically equal to trade inflows

            That’s one thing that I don’t understand (or agree with). Why must the country with the reserve currency run a trade deficit to balance the capital outflow? Why can’t it just hit the printing machine to create any extra currency needed?

            To me, this trade deficit excuse is just that, an excuse. And no, I don’t foresee the US giving up willingly its privilege of issuing the reserve currency status.

            Reply
            1. Yves Smith Post author

              *Sigh*

              US dollars acquired by a foreign buyer ARE a capital outflow. I hate to sound harsh, but we aren’t here to provide tutorials on issues this basic. Please use a search engine.

              Reply
      2. Jose Freitas

        But strenghtening the USD can have many unforeseen consequences, Luke Gromen calls it Putin’s Paradox:

        The higher the USD goes against every currency in the world (except the RUB), the greater the incentive every nation in the world will have to buy oil from Russia in non-USD, just to survive (thereby de-dollarizing their oil imports.)

        This is of course not necessarily good for Russia, since they are struggling to devalue it from the current 60 to USD vs. 80 to USD.

        Reply
        1. NotThisAgain

          The higher the USD goes against every currency in the world (except the RUB), the greater the incentive every nation in the world will have to buy oil from Russia in non-USD, just to survive (thereby de-dollarizing their oil imports.)

          I’m not sur I follow this reasoning–why would oil not simply rise on a ruble-denominated basis in order to align with the price on a US dollar basis?

          Honestly, I think that the biggest –entirely foreseeable–consequence of a rising US dollar is that Africa, Latin America and Asia are going to get absolutely decimated economically (Europe is screwed anyway). Their costs are already going up due to food and fuel shortages, and they will need to raise interest rates to prevent capital flight.

          I would be willing to make a reasonably sized bet that the majority of world leaders will not survive the next 6-24 months.

          Incidentally, this may “force” the US to reduce interest rates by early next year against its wishes, which causes a whole set of other (severe) headaches. I don’t have a strong feeling about this and am not involved in financial markets, but if I were forced to bet, I would bet on interest rates declining, not rising after November.

          Reply
          1. Jose Freitas

            But Russia is selling its oil in rubles now (I know it’s way more complicated than this), and so they would presumably price it in rubles. How this would affect everything else I have no idea, except to agree with you that USD going up will destroy the developing world (and probably also the developed world to a certain extent). I am not involved with financial markets etc… either.

            And yes, I agree that most current govts will be gone in a year’s time.

            Reply
  2. NotTimothyGeithner

    “While clever in theory”

    There is nothing clever in theory about this scheme. It’s entirely dependent on the idea Russia needs Euros to conduct commerce and that the largest economy in the world will care. It’s the creation of the minds of people who thought cutting off oligarchs would weaken what is a popular government.

    Orientalism is the driving force of this scheme. Putin and ordinary Russians will be appalled they may not have access to the whitest people they will fold to just bizarre colonial edicts. That it’s gone on this far is a sign of a decadent and decayed Western hive mind.

    Enforcing it on former colonial subjects who largely were freed through threats of violence is so mind-numbingy stupid. I feel like the pageantry for that dead German woman who lived on an island must be really wrecking G7 elites minds.

    Reply
  3. The Rev Kev

    I can just see the G-7 sanctioning China because they are buying Russian oil – even if they do not use dollars or Rubles in their transactions. Think that China would take this lying down? India might buckle but then all that oil that they have been shipping to the EU would probably dry up. Then the fun would begin in the EU. And will this scheme be introduced before or after the midterms in the US. If before, how will Americans feel about $10 a gallon gas? Will $300 a barrel oil be enough to push the world into a general recession? I can only imagine how all this will go down in South America, Africa and Asia. I can think of nothing more effective in having the G-7 countries being isolated from the rest of the world. At least all those agents will not have to worry about being sanctioned. The Russians won’t ship that oil so there will be nothing to sanction. But I bet that OPEC cuts production when this happens as if this was ever successful, it would be the G-7 that will be telling OPEC what prices to sell oil then. So they will help Russia by raising prices even more. Hmmm. Maybe I should go buy a bicycle.

    Reply
    1. hemeantwell

      This looks like the NATO bloc trying for another version of the knockout victory that was planned for in February and March. As Yves and other have noted, they realize that a drawn-out conflict will be perilous economically and politically. I worry about what this indicates regarding the level of desperation in the bloc, and what they might do when this ploy also fails. Hopefully not relevant, but I’m reminded of the 1/4 serious vid by Lira from February in which he talked of the NATO leadership as a coked-up driver speeding along at 120 mph who, upon hearing the police sirens, floors it. Yee-hah.

      Reply
  4. Stephen

    The G7 is creating a Buying Consortium that wants to set a target price for one producer. Per classic procurement methodology that can only work if there is high demand power and low supply power. We have the opposite:

    1. G7 demand power seems low, given that China, India and other economies buy oil (and presumably will not use dollar payment systems nor accept “sanctions”) so that this G7 buying consortium does not have the monopsony power that it craves and would need for this to have some chance;

    2. Russian supply power then seems very high, given that they are part of a very aligned producer consortium in the name of OPEC+ that is not the only game in town but is the one that matters when it comes to major volume flows, and which operates to maximize producer revenue. Effectively we have monopoly power across OPEC+ that they will use especially given that what can be done to Russia today could be done to all of them tomorrow;

    The procurement text book says that in such a condition of low demand power and high supply power then your only creative strategy is to buy something else / find alternative purchases instead. Otherwise, you are stuck. Which feels where we are.

    Given the likely inelastic supply of oil then less volume will just raise the price. Maybe Russia can make more money from 9.5 million bpd per day versus 11.9 bpd today (as I understand the quoted volumes).

    Is Supply and Demand curve logic and price elasticity on the Economics 101 Crash Course that G7 Finance Ministers take? Procurement logic clearly is not.

    Reply
    1. NotThisAgain

      I don’t think that the EU is really this obtuse. Rather, I think that their two alternatives are to capitulate or to double up and hope for the best.

      In the event that the doubling up doesn’t work, they will simply capitulate and be (not that much) worse off compared to capitulating now.

      This wouldn’t be my approach, but I don’t think they have very many good options left at this point. The least worst option other than hoping for a miracle is to hope that the winter is somewhat mild and they can somehow muddle through and negotiate a better deal by spring.

      Just to be clear, that is a *very* bad option to have to rely upon.

      Reply
    2. Yves Smith Post author

      You are missing the point. It’s in the headline and the text. The G7 intends to force the price cap on all oil buyers because they use the dollar payments system. All banks and all oil traders will be subject to the new reporting requirements.

      It appears word of the planned Treasury mechanism has not really gotten out. China has said no way no how does the US have any business interfering in US. I haven’t seen a new round of China complaints.

      Reply
      1. Stephen

        “This would apply to traders in non G7 countries too.”

        Ah, I somehow missed that very clear bolded point in italics! Apologies. Wow. Then over indexed on the Oilprice.com article which, as you did say, is behind the curve and talks about “countries that join the price cap”. I think I now get it: no trader anywhere has a choice in this if they ever use the dollar payments system.

        If that really can be enforced on all traders / oil buyers then that will give them the power they crave. Ouch. So if Russian volume is then removed as a result and OPEC does not increase volume to substitute (as you say, why would they) then the world market price shoots up I guess. But Russia does not get to enjoy the benefits. Or Russia just complies with the price cap perhaps, despite what they are saying (seemingly highly unlikely though).

        A last gasp of western dominance versus the rest of the world, perhaps? And not worrying about the long term implications and possibly unforeseen consequences of blatantly weaponizing the world’s financial infrastructure in such a way. Quite apart from boomerang impacts on G7 economies.

        I was totally wrong. It is fiendishly clever in a kind of James Bond SPECTRE / kamikaze way. Too clever perhaps.

        Reply
  5. Ignacio

    “Russian oil will have to sail on non-Western tankers if it is to avoid the price cap, and there simply aren’t enough tankers available.”

    What if tankers decide to change flag to find oil to transport?

    Reply
    1. tegnost

      I think the idea is that by using only unsanctioned shipping, Russia can drive the cost of oil up to cover whatever losses the myopeia imposes.
      There is no incentive to reflag, other than to make even more rubles…so…
      I guess that happens, but doesn’t ease prices.
      We shall see, watching crude prices lately it seems like there’s a spike protection team keeping it in a range over 80 below 90 so manipulations don’t have to be transparent, it’s not like we exist in a free market or anything.

      Reply
      1. nippersdad

        IIRC, fracked oil here in the US only gets profitable over seventy dollars a barrel, so that may be what you are seeing with the “spike protection team.” Russia, OTOH, has base profitability at around forty dollars a barrel, so the proposed cap at around forty or fifty dollars actually hurts demand for US fracked oil. Even with the Strategic Oil Reserve having been depleted and purchases to refill it pushing up the price, if it all works out as planned, it is difficult to see how that would work profitably from the perspective of domestic producers.

        This is the point at which I smell a rat. There are no environmentalists at Treasury.

        So maybe they realize that it cannot actually work? Maybe the heightened prices resulting from the oil cap are meant to be a subsidy for domestic drillers? Maybe it is meant to provide a rationale for all of those Canadian tar sand operations that have to be subsidized just to make them work out financially?

        Which brings up diesel. Seems like there was a shortage of diesel because we did not have a very good domestic supply of heavy grade crude. Surreptitiously buying Russian oil overcame that when Biden could not get Venezuela or Iran on board, so maybe the idea is to substitute Canadian tar and get those oil pipelines “built back better”? Could that have something to do with Manchin’s permitting side deal?

        When you turn the lights on there are likely to be more roaches scuttling around in all of this than have been anticipated.

        Reply
    2. vao

      Many oil tankers are already registered in Panama, Liberia, or the Marshall Islands for instance, and those countries are quite prompt at implementing exclusionary measures against states or companies that fall under sanctions from the USA, the NATO, or the G7. Iran-owned shipping was one the victims of an embargo that finds its translation into blocking or sequestering vessels carrying prohibited oil. Thus Panama deregistered at least 60 Iranian ships (not just tankers) when the USA imposed sanctions against Iran.

      Small countries embedded in the globalized economy are very pliable to the wishes of Western powers. Things might be different if oil tankers start to get registered in Russia, China or India. Apart from that, registering a vessel requires proof of liability insurance and, surprise, the G7/NATO also sanction those companies that insurance Russia ships or cargo…

      Reply
    3. Michael.j

      I find the tanker ownership issue intriguing. Whoever owns the tankers, and their willingness to choose a side of this bifurcation may determine the outcome of a war between a global commodity producer and the forces of finance.

      In the long term it’s logical that the commodity producers will build and supply their own transport.

      Reply
    4. Yves Smith Post author

      This is an example of OilPrice being behind the curve. The Maritime Executive story says enforcement will happen at the level of the traders, not tankers, and they quote the relevant provisions.

      Reply
  6. Dave in Austin

    The usual Baroque nonsense.

    Putin has no reason to stop selling oil because the oil he does sell under this proposal will be “low priced” oil at, lets say, $100/BBL when the market price goes to $125.

    And the UE/Greek tanker owners are already probably drawing-up the contracts to change the ownership docs of thier Liberian flagged ships from Turks and Cacos to the Marshall Islands. After that the whole fleet can be sold to Chinese non-cooperating interests for cash- under a sale/repo arrangement so the Greeks can buy the ships back after the price cap fails.

    Capitalism is truly a wonderful system. Suez Max tankers are the new Jackie Kennedy. Where there’s a Greek shipping magnate there’s a way.

    Reply
    1. Yves Smith Post author

      That is not what Russia is saying and as Scott Ritter has said, “Putin don’t bluff.”

      You also apparently did not read this with any care. The enforcement mechanism will not be through the tankers. It will be by kicking the TRADERS, as in buyers, off the dollar payments system. It’s even in headline. Buyers in China and other places use the dollar system to pay for oil. There isn’t a remotely developed enough system to handle the huge volumes of oil transactions. Why do you think Iran was trading via Standard Chartered if there was another route?

      I think this does risk raising the ire of the Global South and particularly China. China has loudly said the US has no business interfering in its trade relations with Russia.

      There is barter and that’s how Jamal Kashoggi’s father Adan got rich. But again that might be viable for a few companies only.

      The US is talking about prices only modestly over Russia’s production cost, estimated at $45, like $60-$65. No way will this program pay $100 a barrel.

      The argument about subsidizing a war machine cuts both ways. Why should Russia subsidize Ukraine and the US and NATO?

      The Saudis will also never accept it. This amounts to breaking OPEC and the other oil producers will not be on board.

      Reply
      1. nippersdad

        I seem to recall that China and India were inking long term contracts with Russia at around $75.00 per barrel a few months ago, early in the sanctions war anyway, which would represent the “discount” they are giving them. Your estimate of sixty to sixty five sounds about right if they want to undercut the OPEC basket price (around $93.00 per barrel right now) and Russia as well.

        Reply
      2. skippy

        Yet at the end of the day how does the western elites control the narrative when other nations have populations that can sux it up way beyond what theirs have become accustomed too due to rampant consumerism – life is better cuz I buy more … and don’t suffer the externalities here and now …

        Life is just a projection of living in a big box store and how that affords tending ones garden …

        Reply
      3. Dave in Austin

        My post was intended to point out that in shipping, which is the real “boots on the ground” issue, the problem can be solved. My position is that the banking/clearing side of the issue is a paper problem, real but subject to workarounds. Will the US be willing to stop depositing dollars in Chinese accounts to cover our trade deficit because the Chinese are recycling the dollars in the banned oil trade without clearing the transactions through the US?

        NATO/US tried to physically enforce the Iran embargo by seizing a ship off Gibraltar. The Iranians countered by taking one in the Persian Gulf. NATO/US found a legal excuse to free the Iranian-chartered tanker; Iran reciprocated.

        The last time an oil/dollar embargo worked was 1941 when the US froze Japanese assets and refused to load Japanese tankers in the US. The Japanese had no alternative source because we and the British compelled the Dutch government-in-exile, the only alternative supplier, to cut-off Aruba and Balikpapan oil sales. At the time the US was by far the world’s leading oil supplier, had the world’s largest tanker fleet and was carefully rationing exports. That was a different world than today.

        Reply
        1. Yves Smith Post author

          You seem to miss that the US has cut itself, Europe, and Africa off from Russian fertilizer and food by failing to relax the banking system sanctions with respect both to transactions with Russia and the use of tankers. The US is also preventing Turkish banks from using the Russian MIR card. Although Turkey loves playing the West off Russia, if we push Turkey too hard, it will leave NATO. It would probably be the result of incremental action: Turkey refuses some NATO diktat, like sending moar weapons. NATO escalates, Turkey refuses to back down, NATO tries to inflict a punishment.

          Reply
      4. Jose Freitas

        One thing I don’t understand, or maybe it’s simply not possible. But wouldn’t it be possible for China (or a group of countries) to take one of their SOE banks, plug it out of the dollar system to insulate it from sanctions, and use it to process transfers/payments in yuans, rubles, whatever, without ever touching dollars? Presumably Russia could price its oil in Rubles. The same might be done with a insurance company, to allow it to insure tankers etc…

        Reply
  7. redleg

    And the rest of OPEC now sees in fine detail how they can be subject to stupid schemes like this.

    Further, I can see the idiots in the NATO palaces using the coming energy shock as a cause for direct kinetic (nuclear) war with Russia (and China, because why not), which will fulfill their wildest dreams. Idiocracy has been achieved.

    Reply
  8. LawnDart

    Natural gas goes bonkers due to supply-constraints, and tanks a chunk of the global economy… …won’t this lead to demand-destruction for oil? 2.2 million bpd ain’t squat when we’re at 100 million bpd in good or normal economic times. And if Russia doesn’t sell now they’re all but guaranteed higher prices for those goods later– and they can afford to wait.

    I really wish I could be on the sidelines and munching popcorn, rather than locked in the monkey-cage.

    Reply
    1. NotThisAgain

      won’t this lead to demand-destruction for oil?

      No–it will lead to demand destruction for everything else because people/businesses/countries will be using their savings to buy oil.

      And if Russia doesn’t sell now they’re all but guaranteed higher prices for those goods later– and they can afford to wait.

      Maybe, but probably not indefinitely. Do not blithely assume that Russia is not also getting hurt by Europe’s actions. Both sides are getting hammered. The question is who gets hammered into submission first.

      To me, the answer is obvious. Unfortunately, the answer appears to be obvious to everybody on both sides of this debate, but there is no consensus, so somebody is clearly wrong.

      Reply
      1. Yves Smith Post author

        Russia is now projecting only a 2% GDP decline for 2022. This seems astonishing but contacts who know people there say ordinary life goes on as usual, stores have goods and employment has held up. Some sectors like used car parts are in desperate shape but the pain is turning out to be spotty.

        Reply
        1. Macu

          Life here (in Moscow) has been remarkably normal this year considering everything that’s happening. Wife travelled south through several towns this summer — there and back — and said the same thing.

          Reply
        2. NotThisAgain

          I will take what you say at face value, but I honestly don’t understand how this is possible–if I recall, ~40% of Russia’s imports and exports were with the EU, and another ~10% was with the US.

          How could the current major disruption only produce a 2% adverse impact?

          But if correct (and if this is sustainable for, say 18 months), then the EU’s actions are even more insane than your original post suggests.

          Reply
          1. Macu

            Major part of Russia’s economy still grey (undeclared) and this plays a role in its resilience. As does the large porous borders and well grooved economic corridors with long-standing trading neighbours like Armenia and Kazakhstan. Much innovation happening in those relationships now as major western firms are loathe to see themselves cut off from Europe’s largest market (while the likes of Turkey, India and China are picking up the slack — noticeable increase in the number of Chinese cars on Moscow’s roads now and they look far better than you might think)

            Reply
        3. Jose Freitas

          Jacques Sapir is a major (contrarian) French economist who specializes in the Russian economy. His Twitter is @Russeurope and well worth following.

          He has done outstanding analyses of the current economy in Russia, and you can see a few of the summaries on Twitter. He is projecting, currently:

          -1,7%/-3% hit to GDP although he thinks it will be around 2% depending on how Q4 goes. He projects probable return to growth in 2023 Q2 or 3.

          He projects inflation in Russia at under 7% by the end of the year. It stands at c. 12% at this point, per RCB numbers. The RCB recognizes that the immense (mostly positive) transformations in the Russian economy have strong inflationary pressures, but it still just reduced its rate to 7,5% down from 8%.

          Budget deficit will stand between 2 and 3%, which Russia could fund easily for years out of its sovereign funds and reserves. It should be noted that Russia has operated at a surplus for decades, and has virtually zero foreign debt (effectively zero since the few small debts they had were defaulted on) Surpluses fund the sovereign funds, as well as special funds under the control of the Ministry of Finances.

          The deficit this year is a function of increased expenses, and not so much due to diminished revenues. Taxes on the general population actually were reduced this year. One of the main problems their budget has is that a lot of the revenue comes from EXPORT taxes on oil, gas, etc… which is sold in foreign currencies on foreign currencies, and since the ruble has strongly appreciated it did mean some reduced revenue here.

          His thread on the deficit (in French):
          https://twitter.com/russeurope/status/1569930055639334913

          To evaluate GDP loss he poured over Russian stat numbers concerning, for ex. production numbers (industrial and other), numbers on transportation (trains, trucks, etc…) His thread on GDP:
          https://twitter.com/russeurope/status/1567476959814336514

          Reply
  9. NN Cassandra

    I thought EU already agreed to ban import of Russia seaborne oil from next year, US did this too, so what is even the purpose of this exercise? Sanction China, India and the rest of Global South?

    And back then Hungary got exception for oil by pipeline, so interesting question is if this price cap will be applied to pipelines to, at least those going into EU.

    Reply
  10. Alice X

    In 2007 the topic was Peak Oil, but then came fracking. This plan by the EU might induce a similar scenario, but that is essentially what the title of the piece indicates. Stephen Cohen, in ca. 2014, said the trajectory then was for war and that Russia would not back down.

    Here is a parallel piece on July 25, 2022, before this latest EU plan by Michael T. Klare from TomDispatch via Tuthout:

    World Oil Production Is Rising, With No End in Sight

    Reply
  11. Lex

    Smells like free markets. I return to the thesis that there is a deep panic setting in amongs the elites in western capitols. None of this has gone according to their plans and their solutions are getting more and more deranged. They’ve created a historical moment too big for them and their egos are too inflated to even consider backing down.

    Reply
  12. rOn cOn cOMa

    And I thought that the whole idea of the inexorable conquest of neoliberalism was to ensure that the price mechanism operated without constraints. The only way the Capitalist God can communicate with us limited rationalistic consumers is through the unfettered word of price. Oh, silly me.

    Reply
  13. MRLost

    One small positive point in this sea of trouble … It seems to me this mess will diminish the likelihood of anyone (Israel or US) starting a war in the Persian Gulf anytime soon. Imagine the price of oil with that supply threatened or significantly reduced.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *